Reply to: Contract clause where Company indemnifies agency against IR35 losses

[ComplianceLady]

In my experience these clauses are written generally with a view to insurance OR if the contractor makes the status decision. If a loss is suffered and the indemnifier has insurance then the indemnified will seek recovery. Generally they won't bother if insurance doesn't exist. It's not a statutory offsetting of liability - it's contractual so it doesn't change who is liable but it allows one party to pursue the other if they incur a liability. Usually those clauses are written for current private sector - so if a liability comes to the Agency when it's Ltd's job to assess status & deduct tax then Ltd pays back Agency.

Some agencies have since tried to write these clauses into the post public sector contract which worked as someone else described - Client & Agency assess & deduct tax respectively but if a liability is incurred they come after limited. Most contractors signed it without noticing but there was pushback. The view from Agency is usually that 1. the limited benefits from an incorrect decision so it's fair they pay any liability, 2. they are forced to indemnify clients so tend to push it down the chain.

I can say from an Agency perspective they are seen as unenforceable without insurance - if agency suffers a liability significant enough to warrant pursuing and pursues limited, the limited will wind up. Anything insignificant it wouldn't be worth the cost of pursuing. They are generally in contracts as a just in case.

[JohntheBike]

What happened with this? I've just been offered a new contract in the public sector but OUTSIDE IR35 and have the same clause in contract ... currently having it checked by QDOS and waiting for a call back from the IPSE legal helpline to see what they suggest and if it would be legally binding but wondered if you had any luck in getting the clause removed?

"waiting for a call back from the IPSE legal helpline"

I'd guess they'd recommend you seek advice from an expert source.

[simes]

Yes, the issue is enforceability. All a clause like this does is give the agency ..............

....................will take one agency figuring out that isn't very secure and insisting on Agent-TLC35 paid by the contractor, and everyone else will follow suit.

Fair play.

Exciting times...

[jamesbrown]

What happens if the role status is changed/deemed incorrect while the contract is still active though? The agent has a 4 week delay from timesheet/invoice to making payment so would in all likelihood just keep the funds using the contract clause as reason (regardless of whether the legal clause was deemed ineffective or not) and then I don't see how you'd ever re-coop those funds without following an expensive legal route.

IPSE's legal helpline advised that the clause could be enforceable and the agent won't remove it so I'm now in a position where I've been offered a great role but it's too risky to take because of the agent trying to circumnavigate the law laid out by HMRC.

If the status changes, then the facts change, and you can terminate (or they will). If the fee payer decides not to pay monies due, then you'd follow the normal route for obtaining that money, and that is a risk of doing business, but I can't see how that situation would arise, because they would want to terminate (and possibly issue a different contract) if the situation changed.

By all means, rely on what IPSE told you. However, there will be different opinions about this and it will depend on the precise nature of the clauses. My opinion is that such attempts will mostly fail, either in substance or because the amount is unrecoverable. Regardless of whether they succeed or fail, the fee payer still carries the risk of not deducting according to their statutory responsibility, and that seems to be the salient point, because they won't rely on the risk having been mitigated by the contract clause (if they have any sense).

There will continue to be speculation about what happens between now and next April (and thereafter), but there isn't long to wait now. I personally think that it will change contracting fundamentally, but we'll see shortly.

[WordIsBond]

Further to 2020, if some clause like the above was ever enforceable (and I admit all of your collective points and, I really have absolutely no idea of this), the fee payer sticks us outside, and, down the line, the tax paying is undertaken by us, the contractor.

I guess the issue is Enforceability...??

Yes, the issue is enforceability. All a clause like this does is give the agency a right to try to reclaim their losses from YourCo, the tax liability still lies with them as far as HMRC is concerned. It may not be enforceable in law due to the statutory provisions, and even if enforceable in law, it may not be enforceable in fact because there is no guarantee YourCo will still be in existence or have the money. An agent may insist on such a provision but they'd be fools to rely on it.

I still think what is likely to arise is engager IR35 insurance. Clients and/or agencies may require the contractor to buy them insurance comparable to TLC35, for outside contracts, but covering their liabilities. They might expect the contractor to pay at least three years of premiums up-front, to protect them against contractor LTDs going out of business.

This clause is effectively that, but it makes the contractor LTD the insurer. It will take one agency figuring out that isn't very secure and insisting on Agent-TLC35 paid by the contractor, and everyone else will follow suit.

[WordIsBond]

IPSE's legal helpline advised that the clause could be enforceable and the agent won't remove it so I'm now in a position where I've been offered a great role but it's too risky to take because of the agent trying to circumnavigate the law laid out by HMRC.

I don't get this.

If it is enforceable, then you are in the same position you've always been in with an outside role -- you are liable for the tax if it is ruled to be an inside role after all.

But chances are if it is a great role that it isn't going to be ruled inside, and there's a decent chance even if it is that the clause is unenforceable.

But if you are worried about it, take the contract, make large pension contributions out of it, and set aside the tax on the remaining amount for six years just in case. Or close your company after the contract (NOT using ER) and start a new one -- that's only problematic if they've started an IR35 investigation prior to you closing it, creating a contingent liability.

[northernladuk]

I think you are over thinking it now. The PS has been around awhile now and it's never happened.

If the role changes significantly anyway then you'll need a new contract. There will be no holding back money or anything. One will end, the new one will start.

But refer back to my first point.

[Sezzler]

All the contract would do is to attempt to recoup a loss. I am saying that it will be ineffective, because the clauses will most likely be found unenforceable, and any sane fee payer will assume that the liability rests with them, regardless of any contractual shenanigans. Either way, the statutory responsibility lies with them and they will have to face the initial consequences of failing to deduct (which may well sink them before any attempt to recoup a loss that is ultimately doomed to fail).

What happens if the role status is changed/deemed incorrect while the contract is still active though? The agent has a 4 week delay from timesheet/invoice to making payment so would in all likelihood just keep the funds using the contract clause as reason (regardless of whether the legal clause was deemed ineffective or not) and then I don't see how you'd ever re-coop those funds without following an expensive legal route.

IPSE's legal helpline advised that the clause could be enforceable and the agent won't remove it so I'm now in a position where I've been offered a great role but it's too risky to take because of the agent trying to circumnavigate the law laid out by HMRC.

[northernladuk]

Keep plugging at it Simes. I'm rooting for you.

[simes]

Statute is statute. A contract can say absolutely anything, but it cannot override statute and it may be completely ineffective, even when it doesn’t override statute.

Fair play.

Back to the drawing board. Mine was only a suggestion in the face of what I am thinking are unworkable situations that end clients really will not understand. Each and every contract will be made further laborious if one believes oneself to be outside IR35 and considers a later clawback process through the HMRC - for each and every contract - with results years down the line.

And then, going somewhat off at a tangent, if companies react like HSBC who, from September are doing away with contractors altogether (they currently say), I am left at a complete loss as to just how much extra tax the HMRC are looking to earn, and how much less work they are looking to do with this move.

Anyway, am sure it'll all work out...

[jamesbrown]

Isn't that exactly the situation we, who work in the Private Sector, deal with right now?

We take a contract on that a fee payer or someone has determined as being a particular flavour of IR35. We do the job and, down the road, subject to investigation and its result, we the contractor are liable for taxes.

Further to 2020, if some clause like the above was ever enforceable (and I admit all of your collective points and, I really have absolutely no idea of this), the fee payer sticks us outside, and, down the line, the tax paying is undertaken by us, the contractor.

I guess the issue is Enforceability...??

Eh? The situation now is that your company has a statutory responsibility under the ITEPA to make the correct deductions. The situation proposed is that the fee payer will have that statutory responsibility. Then, separately, you’re suggesting that the fee payer can transfer the liability for a failure to deduct via the contract. These two things are completely different and unrelated. Statute is statute. A contract can say absolutely anything, but it cannot override statute and it may be completely ineffective, even when it doesn’t override statute.

All the contract would do is to attempt to recoup a loss. I am saying that it will be ineffective, because the clauses will most likely be found unenforceable, and any sane fee payer will assume that the liability rests with them, regardless of any contractual shenanigans. Either way, the statutory responsibility lies with them and they will have to face the initial consequences of failing to deduct (which may well sink them before any attempt to recoup a loss that is ultimately doomed to fail).

[simes]

Read that scenario back: fee payer has a statutory responsibility to make the correct deduction, fee payer fails to make the correct deduction, fee payer tries to pass on the liability for their mistake to the contractor's company (assuming it still exists) or, more likely, to the contractor.

Isn't that exactly the situation we, who work in the Private Sector, deal with right now?

We take a contract on that a fee payer or someone has determined as being a particular flavour of IR35. We do the job and, down the road, subject to investigation and its result, we the contractor are liable for taxes.

Further to 2020, if some clause like the above was ever enforceable (and I admit all of your collective points and, I really have absolutely no idea of this), the fee payer sticks us outside, and, down the line, the tax paying is undertaken by us, the contractor.

I guess the issue is Enforceability...??

[simes]

Yes, this is what you were suggesting. When you apply 'opt out' to IR35, though, you give the entirely wrong impression, that somehow you can have it not apply.

Very simply, you can't opt out of IR35. This is an attempt to contractually let the client/agent 'opt out' of their responsibility to administer it properly under the reforms, by pushing all the liability for that onto the contractor.

It is probably not enforceable and HMRC will probably not accept this. The biggest point of the 'reforms' is to let HMRC stop chasing individual contractors (who often enough know how to win these cases or have engaged someone who knows how). And when they did beat a contractor, sometimes his company didn't have the funds, so then they had to pierce the corporate veil, which might be difficult if he'd had contract reviews and been careful with what he was about.

They want to chase clients and win swathes of cases at a time, rather than fight them one at a time and lose half of them. And they want liability to be with the client / agent, who have deeper pockets and aren't going to disappear. So this clause is irrelevant as far as HMRC is concerned.

It does mean that client/agency can try to recover losses from YourCo if they are held liable for failing to operate IR35 properly in your case. But if they are found to be negligent in their administration of IR35, it's hard to say whether they could then hold you liable for that. It would be an interesting case for sure. And should they be also able to recover costs they spent fighting the case? I think they'd have a hard one with that.

And of course, if YourCo doesn't have money, or has been closed, they aren't going to get too far with a claim. You'd probably have to disclose it as a contingent liability if an investigation started before you started the process of closing your company, though.

I think there was some misunderstanding from my initial post, that, because it was sitting in an Opt Out thread for something else, there may have been a misinterpreted inference that I was suggesting 'opting out of IR35.'

Of course, I absolutely understand one can't 'opt out of IR35'. That is rubbish. Doesn't make sense, etc. And, apologies on my part for any misinterpretation.

But, back to the clause, which has now surfaced, and, as you say, may or may not be enforceable under HMRC rules, I was figuring exactly this as a way to get the early decision, prior to starting the contract, as being outside IR35.

If the HMRC think they are going to have fewer court cases and less work to do, while recouping greater tax funds, then I think they will have coming to them, another great big think. The cases will all just be brought to the HMRC by the contractor. I believe, IMHO.

At least, this is what I will be doing, if I can't find a way to assure myself of this 'outside' position...

[jamesbrown]

Is it essentially saying that, The contract is deeming it is an Outside IR35 gig, and that if down the road, it is later deemed to be Inside IR35, that the tax and NI should come out of the contractor's pocket?

Yeah, good luck with that.

Read that scenario back: fee payer has a statutory responsibility to make the correct deduction, fee payer fails to make the correct deduction, fee payer tries to pass on the liability for their mistake to the contractor's company (assuming it still exists) or, more likely, to the contractor.

Such clauses have a very low probability of success IMHO and, whatever that low probability of success, the fee payer will be correcting their mistake (read: paying all tax due, plus interest and penalties) before any liability can be recouped from the contractor. All of that to say: no fee payer with half a brain will rely on it.

[northernladuk]

Ok, well if the wider forum users also agree with this interpretation, then I find this very interesting.

In another thread back in April 2018, and in relation to when the Private Sector reform comes in from 2020, I actually proffered this contractual clause as something that could be used by the contractor to encourage an Outside IR35 decision;

1. Prior to starting a contract, and
2. Prior to any litigious clawback process for tax and NI which as yet, is not understood or considered.

That this clause has now already been used by someone in a contract suggests that this may be a way through the 'post reform' environment to commence a contract with an Outside IR35 decision.

From post 596 on this thread;
https://www.contractoruk.com/forums/...03-act-20.html

You will note that His Northern Trollness and Malvolio found my proposition silly...

And there is a very good reason for that. Note we aren't the only two.

Here is the actual post in question.

https://www.contractoruk.com/forums/...ml#post2544935

You simply cannot Opt out of IR35. Period. Everyone in the chain should really know this else they are really failing in their due diligence around the contract and engagement. They also shouldn't be taking such a risk with untested and potentially very risky clauses in contracts. HMRC don't seem to know what they are doing most of the time with IR35 so clauses like this mean nothing. HMRC will continue to follow the chain as they expect to and the only way to even attempt to make your clause stick is a lot of very expensive court cases.. which won't happen as a clause like this cannot trump legislation. The client will either know this or won't want to go anywhere near a risk like this.

And what if the contractor shuts up shop and can't won't pay? How would that make a client/agent feel any more comfortable.

and so on and so on...